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42 Cisco Systems, Inc.
Foreign exchange forward and option contracts as of July 29, 2006 and July 30, 2005 are summarized as follows (in millions):
Notional Amount Fair ValueJuly 29, 2006
Forward contracts:
Purchased $ 1,376 $ (2)
Sold $ 554 $ (3)
Option contracts:
Purchased $ 591 $ 20
Sold $ 573 $ (2)
July 30, 2005 Notional Amount Fair Value
Forward contracts:
Purchased $ 1,011 $ (5)
Sold $ 450 $ 9
Option contracts:
Purchased $ 1,028 $ 10
Sold $ 1,002 $ (7)
Our foreign exchange forward contracts related to current assets and liabilities generally range from one to three months in original
maturity. Additionally, we have entered into foreign exchange forward contracts related to long-term customer nancings with maturities of
up to two years. The foreign exchange forward contracts related to investments generally have maturities of less than one year. Currency
option contracts generally have maturities of less than 18 months. We do not enter into foreign exchange forward and option contracts for
trading purposes. We do not expect gains or losses on these derivative instruments to have a material impact on our nancial results. See
Note 8 to the Consolidated Financial Statements.
Interest Rate Derivatives
Our primary objective for holding xed income securities is to achieve an appropriate investment return consistent with preserving principal
and managing risk. To realize these objectives, we may utilize interest rate swaps or other derivatives designated as fair value or cash ow
hedges. We have entered into $1.0 billion of interest rate swaps designated as fair value hedges of our investment portfolio. Under these
interest rate swap contracts, we make xed-rate interest payments and receive interest payments based on LIBOR. The effect of these swaps
is to convert xed-rate returns to oating-rate returns based on LIBOR for a portion of our xed income portfolio. The gains and losses related
to changes in the value of the interest rate swaps are included in other income, net, in the Consolidated Statements of Operations and
offset the changes in fair value of the underlying hedged investment. As of July 29, 2006 and July 30, 2005, the fair values of the interest
rate swaps designated as hedges of our investments were $45 million and $15 million, respectively, and were reected in prepaid expenses
and other current assets in the Consolidated Balance Sheets.
In conjunction with our issuance of xed-rate senior notes in February 2006, we entered into $6.0 billion of interest rate swaps designated
as fair value hedges of our xed-rate debt. Under these interest rate swap contracts, we receive xed-rate interest payments and make
interest payments based on LIBOR. The effect of these swaps is to convert xed-rate interest expense to oating-rate interest expense
based on LIBOR. The gains and losses related to changes in the value of the interest rate swaps are included in other income, net, in the
Consolidated Statements of Operations and offset the changes in fair value of the underlying debt. As of July 29, 2006, the fair value of the
interest rate swaps designated as hedges of our debt was $155 million and was reected in other long-term liabilities in the Consolidated
Balance Sheets.
Equity Derivatives
We maintain a portfolio of publicly traded equity securities which are subject to price risk. We may hold equity securities for strategic
purposes or to diversify our overall investment portfolio. To manage our exposure to changes in the fair value of certain equity securities, we
may, from time to time, enter into equity derivative contracts. As of July 29,2006, we have entered into forward sale and option agreements on
certain publicly traded equity securities designated as fair value hedges. The gains and losses due to changes in the value of the hedging
instruments are included in other income, net, in the Consolidated Statements of Operations and offset the change in the fair value of the
underlying hedged investment. As of July 29, 2006, the notional and fair value amounts of the derivatives were $164 million and $93 million,
respectively. As of July 30, 2005, the notional and fair value amounts of the derivatives were $198 million and $19 million, respectively.
Quantitative and Qualitative Disclosures About Market Risk